Concepts of Financial Markets

Banks and financial markets are opposing intermediaries in the financial structure, and give households a choice of where they want to set their savings. A financial market is a market for the conception and exchange of financial assets. Financial markets exist wherever a financial transaction occurs. Financial transactions could be in the form of creation of financial assets such as the primary issue of shares and debentures by a firm or the purchase and sale of existing financial assets like equity shares, debentures and bonds.

Some Common Types of Financial Market:

  • Capital Markets: A capital market is one in which individuals and institutions trade financial securities
  • Stock Markets; It allow investors to buy and sell shares in publicly traded companies.
  • Bond Markets: A bond is a debt investment in which an investor loans money to an entity, which borrows the funds for a defined period of time at a fixed interest rate.
  • The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a year.
  • Cash or Spot Market: Investing in the cash or “spot” market is highly sophisticated, with opportunities for both big losses and big gains.
  • Derivatives Markets: The derivative is named so for a reason: its value is derived from its underlying asset or assets.
  • The forex market is where currencies are traded.

A business is a part of an economic system that consists of two main sectors – households which save funds and business firms which invest these funds. A financial market helps to link the savers and the investors by mobilizing funds between them. When the allocative function is performed well, two consequences follow:

  • The rate of return offered to households would be higher
  • Scarce resources are allocated to those firms which have the highest productivity for the economy.